Reed Smith Client Alerts

State legislatures have been busy enacting new tax laws and modifying existing tax laws in the wake of Federal tax reform, the Supreme Court’s Wayfair decision, and each state’s own budgetary concerns.  That is no different in the District of Columbia, Maryland, and Virginia – or the DMV, as it is affectionately known to locals.  D.C. is on the brink of slashing tax benefits previously offered to high tech companies doing business in the District; Virginia ordered its tax department to issue guidelines for applying the limitation on interest expense in new IRC Section 163(j) at the state level; and Maryland finally provided the Comptroller with funding necessary to implement a long-awaited private letter ruling system.  These are just some of the changes affecting corporate taxpayers in the DMV.

D.C. Pulls the Plug on Certain High Tech Tax Breaks

When Mayor Muriel Bowser first introduced her Fiscal Year 2020 Budget and Financial Plan on March 20, 2019, the $15.5 billion budget did not include any major corporate tax provisions. That changed on May 14, when the D.C. Council’s Committee of the Whole passed an amendment to the Fiscal Year 2020 Budget Support Act of 2019 (B23-0209) aimed at reducing tax breaks for Qualified High Technology Companies (QHTCs) in order to increase and reallocate revenue to housing, environmental, and other social programs.

Under existing law, D.C. taxpayers that meet the statutory requirements for QHTC certification enjoy a host of corporate franchise, sales and use, and property tax benefits. The amendment, named the Downloading Lost Revenues Amendment Act of 2019, makes the following changes beginning 2020: 

Tax Credits

  • Reduces the tax credit for wages to qualified employees to 5 percent of wages paid in the first 24 months after hiring (the current credit is equal to 10 percent of wages paid in that period);
  • Reduces the maximum allowable credit to $3,000 for each qualified employee (the current maximum credit is $5,000 per qualified employee); and
  • Eliminates the ability to carry forward unused credits for employees hired on or after October 1, 2019.

Corporate Franchise Tax

  • Limits application of the reduced 6 percent corporate franchise tax rate to 5 years (under existing law, the reduced rate applies for as long as the entity continues to certify as a QHTC); and
  • Caps the total amount of franchise tax reduction that a QHTC may receive as a result of the reduced rate to $250,000 per taxable year (under existing law, there is no limit on the amount of tax reduction that can result from the reduced rate).
  • The bill does not address the exemption from corporate franchise tax for the first five years in which a QHTC has taxable income, or any other provision affecting QHTCs not discussed here.

Sales Tax

  • Repeals the exemption for most sales by QHTCs in the District; and
  • Repeals the exemption for sales to QHTCs of certain computer and technology equipment.
  • These provisions will affect non-QHTCs as well.

The Council is scheduled to vote on the budget bill, as amended, on June 18, 2019, and it is expected to pass without major changes. Once it passes and is signed by the Mayor, it will enter a 30 day Congressional review period before becoming law. QHTCs and companies doing business with QHTCs in the District should begin considering the impact of these changes going forward. 

Jeremy Abrams is the outgoing chair and DeAndre Morrow is the incoming Chair of the DC Bar SALT committee. They will be closely monitoring how the Office of Tax and Revenue implements these changes to the QHTC provisions.